Starbucks Cuts Earnings Guidance

Cost of Turnaround Effort, 'Economic Environment' Hit Bottom Line

CHICAGO (AdAge.com) -- Starbucks' turnaround has hit its first visible snag. The company will release second-quarter earnings next week, but cut it guidance yesterday, citing problems in the economy and costs associated with its transformation.

The coffee giant will miss analyst estimates by about 6 cents per share, and reported that same-store sales will be negative, "in the mid-single digits." Starbucks will also miss its full-year earnings estimate.
Starbucks CEO Howard Schultz said he is enthusiastic about the opportunity to reinvigorate the company by aggressively implementing a series of customer-focused initiatives. Credit: AP
"The current economic environment is the weakest in our company's history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers," Starbucks CEO Howard Schultz said in a statement.

California, Florida
Starbucks' disappointing same-store sales, it said, were caused by decreased traffic. California and Florida, two states hit hardest by the housing crisis, were cited as areas of particular weakness. Those states account for 32% of Starbucks retail revenue and 31% of the company-operated retail presence.

Mr. Schultz said that while the economy is having a "substantial impact" on performance, he remains enthusiastic about the opportunity to reinvigorate the company. "We are doing so by aggressively implementing a series of customer-focused initiatives," he said. "These are in the early stages of their execution and the benefits are therefore not yet reflected in our financial results."

Mr. Schultz's plan for Starbucks includes new machines, a form of loyalty program, a social-networking site, environmental commitments and a new brewed coffee blend. The chain has gone to great lengths to promote Pike Place Roast in recent weeks, in some ways once anathema to the brand. Starbucks has taken out newspaper ads, passed out coupons on the street, and sent out cards in certain markets, including Chicago and Washington, entitling consumers to a free coffee on every Wednesday through the end of May.

Cost of turnaround
Starbucks said the cost of these initiatives, announced in mid-March, are already affecting the company's bottom line. For the second quarter ended March 30, Starbucks reported charges of 3 cents per share associated with the turnaround.

David Palmer, an analyst with UBS, pointed out that many of Starbucks' locations are in the vicinity of shopping.

"As such, poor retail trends can hurt Starbucks more than a traditional QSR," he wrote in a report. "That said, excessive unit growth has led to a slip in in-store execution."

"Further, Starbucks has clearly lost its brand buzz through poor innovation -- leaving the chain even more vulnerable in this recession," he said. Mr. Palmer noted the drinks listed on Starbucksgossip.com as the chain's lineup are a mint Frappucino, blended lemonade and green tea, and a "double shot + energy." While the drinks are unconfirmed by Starbucks, he said, "these drinks sound a little better than recent offerings and could, along with tax rebates, bolster summer sales trends."

While the company continues to navigate choppy waters, Mr. Schultz stressed that Starbucks is doing its best to keep costs under control. In the interim, he said he believes consumers are trading away from out-of-home coffee, rather than to cheaper cups of joe.

Staying loyal
"Underscoring my optimism is our customer research, which shows that while our customers are reducing the frequency of their visits to our stores -- due to the economic pressures they are feeling -- they are not substituting their Starbucks experience with coffee products from others," he said.

Stay tuned. When Starbucks reports full second-quarter results next Wednesday, it will also provide guidance for "key financial metrics" for the next three years.

Starbucks was a Wall Street darling that had more than tripled its number of U.S. locations in two years when it reported its first decline in customer traffic last fall. The company answered with its first-ever TV ad campaign, from agency Wieden & Kennedy, Portland, Ore. The campaign began Thanksgiving weekend.